Maybe it's the Easter effect, but I can't get the image out of my head of Treasury Secretary Tim Geithner padding around the carpeted halls of D.C., trailing a flock of freshly-hatched chicks that fawningly chirp pee-pip, pee-pip. I am speaking, of course, about the PPIP, or Public Private Investment Program, the Treasury's latest plan to remove toxic assets from bank balance sheets.
As you no doubt have surmised, I have some trouble taking the plan seriously. The fact is, rather than selling assets and getting healthy as the government would like, banks may find themselves locked in a stare-down contest.
Certain details of the PPIP have yet to be released, but essentially, the plan allows private investors to access government-guaranteed debt in order to purchase banks' questionable loans and asset-backed securities. In the Treasury's own words:
We expect that the provision of leverage through this program will give investors greater confidence to purchase these assets, thus increasing market liquidity.
As other commentators have pointed out, the implicit hope here is that the outsized returns made possible by leverage will cause investors to bid up prices beyond what they otherwise would, in turn raising bank capital levels by exactly that much more. Such leveraged thinking sounds eerily familiar to the machinations that got us into this mess in the first place. But even allowing for this optimistic scenario, banks must agree to put assets up for sale. Oh yeah, they also have the liberty of accepting or rejecting final bids.
The decisions that banks make in this regard are sure to be viewed by the market as a proxy for individual bank health. Banks that rush to unload large asset chunks and repeatedly accept final bids are likely to be labeled more troubled than peers -- a perspective that will be reflected in share price. Bank CEOs may be idiots, but they're no dummies. Consequently, I imagine that there is ample closed-door talk about how to not be the guy who blinks first in this Treasury-engineered competitive match-up.
Pitching a more hopeful view, it has been pointed out that banks such as PNC (NYSE: PNC ) , Wells Fargo (NYSE: WFC ) , State Street (NYSE: STT ) , and JPMorgan Chase (NYSE: JPM ) have marked over 30% of their assets to market prices. Presumably, that means that any bid above current market price should entice these institutions to sell. In a vacuum, yes, but in a public forum where every move will be understood with plenty of assumption and skittishness by Mr. Market, I am not so sure that bank management will do what's best for the balance sheet at the potential expense of share price.
In the end, if you were looking for a reason to buy banks, I'd wait for evidence that the PPIP is more than a cute idea.
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